NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Jacksonville Aviation Authority, FL's (authority) outstanding $53.3 million series 2006 airport revenue bonds issued on behalf of the Jacksonville International Airport (airport). The authority also has approximately $97.4 million in outstanding parity notes that are not rated by Fitch. The Rating Outlook remains Stable.
The airport's rating affirmation reflects a stable air trade area with softening traffic trends that serves a large metropolitan area of northeast Florida and an appropriate mix of year-around business and leisure travel. The airport is serviced by a well-balanced mix of major carriers with competitive cost per enplanement (CPE) levels, $6.82 in fiscal year (FY) 2013. The rating is further supported by a sound airline agreement, manageable capital needs and robust financial metrics.
KEY RATING DRIVERS
Medium Hub O&D with Some Volatility: The airport served slightly more than 2.5 million enplanements in FY2013 but this base has eroded nearly 20% since FY2007, including a decrease of 3% in the most recent fiscal year. Three major carriers account for 80% market share. Revenue Risk - Volume: Midrange
New Low Cost Profile: The airport's new airline use and lease agreement (AUL) provides strong cost recovery terms and adds strength to the airport's financial condition. CPE levels are expected to remain stable in the upper-$6 range, net of an $11.3 million annual airline transfer payment. The airport's revenue mix appropriately balances aviation and non-aviation sources equally. Revenue Risk - Price: Midrange
Moderate Infrastructure Plan: The five-year capital improvement plan (CIP) is modest at $120 million, funded by airport monies, passenger facility charges (PFCs) and grants. Infrastructure Development and Renewal: Midrange
Fixed Rate Debt with Some Refinancing Risk: The airport's debt is fixed rate with a predominantly flat-to-declining amortization. Refinancing risk exists with a $34.7 million bullet maturity in FY2023. The authority is expected to extend the maturity. Debt Structure: Midrange
Manageable Leverage and Adequate Liquidity: The airport's net leverage position of 3.5x cash flow available for debt service (CFADS) is currently moderate and should remain so for the foreseeable future. The airport also maintains both high coverage levels (1.71x in FY2013) and adequate funding balances supported by debt service reserves and 409 days cash on hand (DCOH).
Traffic Base: Significant declines or volatility in the enplanement base would negatively pressure the current rating level;
Operating Performance: Management's ability to maintain and grow non-aviation related revenue while managing cost escalation is critical in maintaining the current rating level;
Financial Position: The addition of material leverage or the dilution of coverage for a sustained period would result in negative rating action;
Positive Outlook: The airport's size and traffic profile, coupled with inherent vulnerabilities to airline decisions, restricts the likelihood of a higher rating at this time.
The authority irrevocably pledges all net revenues of the airport, available PFC revenues and all funds established by the Bond Resolution. The PFC fund is currently pledged for payment on a portion of debt service on the series 2006 bonds and the 2012 note. Holders of the other parity obligations do not have a claim on deposits in the PFC fund.
The airport's traffic has eroded 19% since reaching an enplanement base of 3.2 million in FY2007. After a 5% enplanement decline in FY2012, the airport lost an additional 3% in FY2013. Through the first eight months of FY2014, there have been improving signs of stabilization, with enplanements up 0.5%. In Fitch's opinion, enplanements should stabilize over the next two fiscal years as the economy shows signs of improvement.
Delta Air Lines (Delta, rated 'BB-' with a Positive Outlook by Fitch), Southwest Airlines (Southwest, rated 'BBB' with a Stable Outlook) and American Airlines (American, rated 'B+' with a Stable Outlook), are the predominant carriers, with 30%, 27% and 25% market share, respectively. These carriers, along with two other major carriers, provide for a well-diversified market.
The airport realized an increase of 11% in operating revenue, almost entirely due to a 51% increase in lease rentals related to the first full fiscal year operating under the new AUL. Non-aviation revenue was flat with a parking increase of 3% while concessions were off nearly 1%. As a whole, operating revenue has seen a compounded annual growth rate (CAGR) of 2.4% over the last five fiscal years. Additionally, the airport utilizes certain non-operating revenue, including PFC receipts, to subsidize debt service. PFC revenue transfers account for a little over a third of annual debt service.
Operating costs increased 3.4% in FY2013 due to increases in salaries, professional services and supplies and an airline promotion. The airport conservatively budgeted for a 6% increase in operating expenses in FY2014, but is currently tracking to an increase of only 3%. Additionally, the airport has budgeted for a 5% increase in FY2015, due to salaries and maintenance. Although operating costs have shown some historic volatility, a five-year CAGR of 1.7% is deemed reasonable.
The authority entered in to a new, five-year AUL effective Oct. 1, 2012. The new agreement is fully residual, with a guaranteed fixed annual transfer of $11.3 million to the signatory carriers. Under the previous agreement, FY2013 CPE was $6.82, and management has indicated that CPE should remain within the upper-$6 range.
The approved FY2014 capital projects total $20 million, with the five-year CIP (FY2014-2018) totalling approximately $120 million. The program focuses on routine maintenance and improvements, as the airport is in good condition, and is funded through a variety of sources.
In July 2013, the authority fully defeased the series 2003 bonds through the combination of a $20 million series 2013 bank note and $6 million cash liquidated from the applicable debt service reserve fund. This issuance resulted in up-front debt service savings of nearly $2.5 million and shortened the outstanding average life of the refunded bonds. No additional debt is expected at this time.
Annual debt service requirements are approximately $16 million in the near term, migrating down closer to $5 million by FY2025. However, the airport has a $34.7 million bullet payment associated with the series 2012 note due in FY2023. Fitch views the debt structure as atypical for an airport and this presents some refinancing risk in the future. Additionally, the airport maintains a fully-hedged floating-to-fixed interest rate swap associated with the series 2008 note. In Fitch's opinion, the airport assumes no interest rate or basis risk, and little counterparty risk with Compass Bank (rated 'BBB+' with a Stable Outlook).
Under Fitch's base case forecast, which assumes level enplanements and escalating costs, the debt service coverage ratio averages above 1.5x with no need to increase above the current CPE level. Fitch's rating case assumes a near-term enplanement stress of 8%, with only slight recovery thereafter, and an additional increase in costs. Under this scenario, CPE has to be annually adjusted by up to a dollar through FY2018, in order to maintain rate covenants; however this is not viewed as a material concern at this time as CPE remains under $8. Gross leverage in both cases averages near 5x, an appropriate amount for the rating category.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Airports' (Dec. 13, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports